Sterling stages rally as the City bets on Theresa May win

The pound rallied earlier as the City bet on an election victory for Theresa May.

Sterling rose as much as 0.5 cent against the dollar to $1.2978 at one stage, and made similar gains against the euro as the final polls of the seven-week battle showed the Conservatives stretching their lead over Labour following recent wobbles.

Although the FTSE 100 was virtually flat earlier as millions headed out to vote, the pound is at a two-week high against the dollar and signs of increasing risk appetite were seen in the bond market as the City moved money out of lower-risk gilts.

After a succession of shock polls showed Jeremy Corbyn closing the gap on the Prime Minister, final polls on Thursday put the Tories’ lead over Labour at as much as 13%.

Sterling’s rally has also been fuelled by a weaker dollar as tepid jobs growth for the US economy casts doubt over rate rises from the US Federal Reserve.

BNY Mellon currency analyst Neil Mellor said: “We have a weakened dollar but the pound has been trending higher against the dollar since the end of last month. There is clearly confidence there.

“We went through a period a week ago when the polls were showing a marked narrowing or a hung parliament but the market has clearly taken heart from the latest polls.”

CMC Markets chief executive Peter Cruddas, a former Conservative Party treasurer, predicted a “strong Theresa May win in excess of 60 seats”.

However, currency trading volumes were low, less than half of their normal daily averages, with more action in options contracts used by City players to hedge against major swings in the currency.

The number of market bets on how volatile the pound will be over the next 24 hours also surged to its highest level since the Brexit vote today, while traders are also hedging against big moves in the FTSE 100 in the biggest numbers for two years.

City Index market analyst Ken Odeluga said: “Some investors are seeking protection as a Conservative majority, while still likely, is looking less like a done deal.”

Markets were also keeping a close eye on the European Central Bank, which is pumping €60 billion (£52 billion) a month into the single currency bloc’s economy, despite it enjoying its best run of growth for a decade.

ECB president Mario Draghi was expected to keep its current stimulus measure unchanged in today’s meeting, although the central banking chief was also set to send a more hawkish signal by removing reference to “downside risks” in his opening policy statement.

“Pressure has mounted to drop his negative downside-risk rhetoric,” Clear Treasury analyst Conor Deering said.